Definition of Emissions Reduction Purchase Agreement (ERPA)
An Emissions Reduction Purchase Agreement (ERPA) is a legal contract between entities who buy and sell carbon credits. A carbon credit is a permit or certificate that allows the holder to emit carbon dioxide (CO2) or other greenhouse gases (GHG) into the atmosphere. In a type of trade-off, a buyer of carbon credits pays cash for the right to emit more than the level of CO2 allocated by the Kyoto Protocol, and the seller receives cash for the obligation to produce less CO2. In order to transact this agreement, both parties must sign an ERPA document.
The Kyoto Protocol — signed in Kyoto, Japan, in 1997 by 192 industrialized countries — is the closest thing we have to a working global agreement to fight climate change. Countries that ratify the Kyoto Protocol are assigned a maximum limit of CO2 emissions levels. Emitting more than the assigned limit will result in a penalty for the violating country in the form of a lower emissions limit for the following period. However, if a country wants to emit more GHG than its allowed limit (without penalty), then it may participate in carbon trading using an ERPA.
Breaking Down Emissions Reduction Purchase Agreement (ERPA)
The Emissions Reduction Purchase Agreement between the buyer and seller of carbon credits is a vital document for developers of carbon-offset projects. It identifies responsibilities, rights, and obligations to manage project risks. It also defines the commercial terms of the project including price, volume, and delivery schedule of emissions reductions. The standards for ERPAs are outlined by the International Emissions Trading Association (IETA) — a nonprofit organization created in 1999 to serve businesses engaged in trading carbon credits.
An ERPA generally involves two countries. However, it also may occur between a country and a large corporation. Often, the seller has implemented new technology or developed a new project that he expects will lower his greenhouse gas emissions, so the seller would not need as many carbon credits and can profit by selling them. ERPAs are often ratified between buyers and intermediaries who represent community groups. In these cases, although the ERPA is a binding contract between the buyer and intermediary, the agreement between the seller and community members is often less clear. Thus it is important to ensure that whatever agreement is made between individual project participants and the intermediary is distinct and well understood by all parties.
What Are the Components of an ERPA?
There are many types of ERPA documents, each with varying impacts on a project and its participants. Regardless of their individual specifications, any ERPA should cover the following key areas:
- Quantity and price of emissions reductions to be delivered
- Delivery and payment schedule of emissions reductions
- Consequences of non-delivery: What happens if the seller fails to deliver the quantity of emissions reductions stated? What requests can the buyer make? Will the seller need to pay a penalty?
- Consequences of default: What happens if the buyer does not pay for the delivered emissions reductions? If the seller gives false information? Or if there are changes in a country’s regulatory structure?
- General obligations of seller: For example, seller is responsible for fulfilling verification and certification; implementing a monitoring plan; general operations of the project; and delivering emissions reductions to buyer
- General obligations of buyer: For example, buyer is responsible for establishing an account to receive delivery of emissions reductions; pay for the emissions reductions; and communicate with relevant regulatory bodies
- Project risks: What are they? Who is responsible for these risks? Are the risks manageable?
The Market for Trading Carbon Credits
Buying and selling carbon credits is relatively straightforward and may be compared to buying and selling shares in a stock market. Because the transaction is paper-based, no physical assets generally change hands; and if you have access to the right amount of money and the right person to help effect the trade, then such transactions are relatively uncomplicated. For newcomers to the industry, it is often tricky to find the right company through which to buy or sell carbon credits and then to decide their price. It is also important to be aware of the types of credits that are available on the market and how they compare with each other.